Insular Boards Guide Many Nonprofits

WASHINGTON, D.C., June 25, 2007 -- Many nonprofit boards are cut off from the public they serve by an ethnically homogenous membership and a failure to engage in externally oriented activities, says a new Urban Institute study.

Fifty-one percent of nonprofit boards have only white, non-Hispanic members. Eighteen percent of nonprofits whose clientele is more than 50 percent black have no black trustees, while 32 percent of their Hispanic counterparts have no Hispanic board members.

On average, researcher Francie Ostrower reports in "Nonprofit Governance in the United States: Findings on Performance and Accountability from the First National Representative Study,"86 percent of board members are non-Hispanic whites, 7 percent are black, 3.5 percent are Hispanic, and the balance are from other ethnic groups.

Only a minority of nonprofits report being very actively engaged in connecting with those they serve. Twenty-seven percent of boards are highly involved in community relations and 23 percent are very engaged in educating the public about their organization and its mission. At the same time, 31 percent are not active in community relations and a third are disengaged from educating the public.

"There is a disturbing level of insularity among nonprofit boards that is at odds with their public-service mandate,"says Ostrower. "Failure to be more engaged in the community may contribute to boards' lack of sensitivity to potential public responses to their practices and decisions."Ostrower's findings are based on her 2005 National Survey of Nonprofit Governance, which drew responses from CEOs or executive directors at 5,115 public charities with at least $25,000 in annual revenues.

More Findings about Board Performance and Composition

Most respondents rated their boards as doing a good or excellent job in an array of stewardship tasks except fundraising, but in no area did a majority rate the performance as excellent. Large shares received fair or poor marks in fundraising (51 percent), monitoring the board's own performance (51 percent), educating the public (42 percent), community relations (36 percent), planning for the future (30 percent), and monitoring programs and services (29 percent).

Recruitment criteria to select new board members are consistently associated with levels of board activity. For instance, emphasizing a willingness to give time was positively associated with activity levels in every role except trying to influence public policy. An emphasis on friendship or acquaintanceship with current board members had a negative association with activity in every board role except fundraising (where it had no impact).

Seventy percent of nonprofits say it is difficult to find new board members and 20 percent say it is very difficult. Recruitment challenges were negatively associated with levels of board engagement in every role. Having the CEO or executive director serve as a voting board member was negatively related to board activity level in financial oversight, setting policy, community relations, and trying to influence public policy, and positively related to none.

While large board size has been cited as contributing to some nonprofit scandals, it did not detract from board engagement. To the extent that it had any association with activity levels (and usually it did not), it was positive with regard to fundraising, educating the public, and trying to influence public policy.

Ninety-four percent of boards include women. On average, boards are 46 percent women. Boards of larger, wealthier nonprofits tend to draw more heavily from members of elite groups. This is indicated by the fact that the percentage of members who also serve on corporate boards rises from 31 percent among the smallest nonprofits to 80 percent among larger ones.

The Legislative and Policy Environment: Sarbanes-Oxley and Nonprofits

One of the major developments shaping contemporary thinking about nonprofit governance originated in legislation aimed at businesses, not nonprofits. The study analyzed factors affecting six practices stipulated by 2002's Sarbanes-Oxley Act: having an external audit, having an independent audit committee, rotating audit firms or lead partners every five years, having a written conflict of interest policy, having a formal process for employees to report complaints without retaliation, and having a document destruction and retention policy.

Having members of corporate boards on nonprofit boards was positively associated with each practice except having a document retention policy. However, the presence of the CEO or executive director as a voting board member (the case at 33 percent of nonprofits) was negatively associated with having an outside audit, a conflict of interest policy, a document retention policy, and a whistleblower policy (and was unrelated to adopting other practices).

"Because conflating executive director and board positions has a negative impact on board performance and detracts from the board carrying out its stewardship responsibilities, nonprofits should think carefully before adopting this corporate practice,"cautions Ostrower.

Financial Transactions between Nonprofits and Board Members

Financial transactions between organizations and board members are extensive, particularly at large nonprofits. Twenty-one percent of nonprofits bought or rented goods, services, or property from a board member or affiliated company during the previous two years. The figure climbs to more than 41 percent among nonprofits with more than $10 million in annual expenses.

Seventy-four percent of the nonprofits that dealt with a board member had an at-market transaction, 51 percent reported below-market deals, and less than 2 percent reported paying above market cost. (Some nonprofits engaged in multiple transactions with board members.) Among nonprofits reporting financial transactions, 60 percent have a conflict of interest policy and 42 percent require board members to disclose their financial interests in companies that do business with the nonprofit.

"Nonprofit Governance in the United States: Findings on Performance and Accountability from the First National Representative Study,"by Francie Ostrower, is available at http://www.urban.org/url.cfm?ID=411479.

"The findings repeatedly emphasize the importance of various recruitment criteria and the ability to obtain board members willing and able to carry out board functions," Ostrower concludes. "It is surprising, nonetheless, how many boards seem not to attend adequately to who and how they recruit, and whether their selection processes align with intended goals—even nonprofits that can pick and choose from prospective members."

Other Publications by the Authors

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